Moat Financial Services v Wilkinson

J U D G M E N T

1. LORD JUSTICE NEUBERGER: This is an appeal from a decision of Mr Recorder Field QC, given in the Bury County Court. It seeks to raise potentially two issues relating to the extent of the liability of the defendants, Mr David Wilkinson and his wife Mrs Barbara Wilkinson ("Mr and Mrs Wilkinson") to the claimant, Moat Financial Services ("Moat"). The two questions that the judge decided, which have been canvassed before us, were, first, whether the extent of Mr and Mrs Wilkinson's liability to Moat was a maximum of £100,000 plus interest or £250,000 plus interest, and, secondly, whether their liability under that guarantee was continuing or specific.

2. The basic facts are as follows. Cartmells Limited ("the company") appears to have approached Moat some time during 1997 with a view to borrowing up to £100,000. On 27th November 1997, two directors of the company, Mr Wilkinson and a Mr Tattersall, signed a letter addressed to the directors of the company ("the facility letter"). That letter was, so far as relevant, in the following terms:

"Dear Sirs: We are pleased to make available to you a loan in the principal sum of One hundred thousand pounds (£100,000.00) on the terms and conditions of this letter. You may draw the loan in one amount on not less than 3 business days' written request to us, but so that no drawing may be made after the 31st day of December 1997.

"You will repay the loan together with interest on it on 1 December 2002 (the redemption date) or at any time forthwith on demand on receiving 7 days notice in writing from us. You may repay the loan or any part of it early but you may not reborrow any amount so repaid..."

"The principal amount of the loan outstanding from time to time will carry interest at the rate of 15 per cent per annum..."

"Repayment of the loan and interest on it must be secured at all times as a continuing security by the following security in a form and substance satisfactory to us:

"1. A Personal Guarantee given by David Ian Wilkinson and Barbara Wilkinson..."

"2. A Legal Charge given by the said David Ian Wilkinson and Barbara Wilkinson over the property 6 Skegness Close..."

"3. A Charge by the said David Ian Wilkinson over his shareholding in Cartmell's Ltd.

"4. A Covenant by Alan Tattersall and David Ian Wilkinson prohibiting the issue or disposal of shares in Cartmell's Ltd..."

"Not withstanding the above provisions of this letter, the loan and all interest on it will become due and payable or repayable forthwith on demand by us if:-

(i) You fail to pay any sum under this letter when due or you are or any third party giving such security is in breach of any other provision of this letter or the security referred to above..."

3. The £100,000 was duly advanced and, on 1st December 1997, Mr and Mrs Wilkinson executed a guarantee ("the 1999 guarantee") in favour of Moat in the following terms:

"In consideration of your having at our request agreed to advance to Cartmell's Limited ... the sum of One hundred thousand pounds (£100,000) under the terms of the Facility letter ('the Facility letter') dated the 27th day of November 1997..."

"We...agree with you as follows:

"1. We guarantee to you the repayment by the Principal of the said sum of £100,000.00 with interest at the rate of 15% per annum...(all such sums being hereinafter together referred to as the Indebtedness)..."

"3. This guarantee shall be a continuing guarantee in respect of the Indebtedness..."

"6. Either one of us shall be at liberty at any time to withdraw from all liability under this guarantee on payment to you of the Indebtedness at that time or of so much of it as shall not already have been satisfied by payment or otherwise..."

4. By 1999, the requirements of the company for money had increased and it appears that there were negotiations between the company and Moat which resulted in a letter, dated 18th February 1999 ("the 1999 letter") from Moat, addressed to Mr and Mrs Wilkinson. It was in the following terms:

"Cartmells Ltd:

"We would refer to our recent discussions regarding the loan facilities of the above company.

"We are pleased to confirm our agreement to increase the amount of the advance from the original £100,000 to a sum not exceeding £250,000... all other terms and conditions as contained in the original agreement of November 1997 to remain in place..."

"Please signify you acceptance of the above by signing the enclosed copy of this letter on your own behalf and on behalf of Cartmell's Ltd."

The letter was then signed on behalf of Moat, and below the signature were the words:

"We hereby agree to the above terms and conditions

For & on behalf of Cartmell's Ltd"

Underneath that, there were two places for two directors of the company to sign. Below that were the words:

"We hereby agree to the above terms and conditions"

Underneath that there were places for, first, Mr Wilkinson and, second, Mrs Wilkinson to sign. Mr Wilkinson and Mr Tattersall signed on behalf of the company and Mr and Mrs Wilkinson also signed where indicated.

5. It appears from the evidence that the balance between the amount previously advanced and the £250,000 referred to in the 1999 letter, had been advanced to the company a day or two before the 1999 letter, presumably pursuant to the "recent discussions" identified in its first paragraph.

6. Unfortunately, the company did not prosper and went into insolvent liquidation. In those circumstances, Moat contended that it was entitled to recover £250,000 plus interest from Mr and Mrs Wilkinson on the basis that the effect of the three documents, to which I have made reference and quoted from, was that their liability as guarantors of the company with indebtedness to Moat was £250,000 and not £100,000.

7. That was the first, indeed the main, issue before the learned Recorder. He concluded, in light of oral evidence as to what was said and not said between the parties, that Moat's contention was wrong, and that the effect of the 1999 letter was not to alter the liability of Mr and Mrs Wilkinson under the 1997 guarantee and that, in those circumstances, they were, subject to any other argument not liable for more than £100,000 plus interest.

8. The second point he had to consider was, as I have indicated, whether or not the guarantee was, to use an expression which is found in a number of places, continuing or specific. That point he also determined in favour of Mr and Mrs Wilkinson on the basis that it was common ground before him, in practice, that the guarantee was specific, despite the reference to "continuing" in clause 3. However, the point is now in issue between the parties.

9. I turn then to consider the first point, namely whether the effect of the 1999 letter, as signed by Mr and Mrs Wilkinson, was to increase the cap on their liability as guarantors from £100,000 to £250,000. In respect of that issue, Mr Nicholas Orr, who appears on behalf of Mr and Mrs Wilkinson, has two principal arguments. The first is that the effect of Mr and Mrs Wilkinson signing the 1999 letter was to do no more than to acknowledge and accept that the loan agreement between the company and the bank, as contained in the facility letter, was to be varied by increasing the facility from £100,000 to £250,000, but that they were not thereby agreeing that they would take on liability for that increase from £100,000 to £250,000 as guarantors. Secondly, that, if that would otherwise have been the effect of the 1999 letter, it failed to comply with the requirements of Section 4 of the Statute of Frauds 1677 ("Section 4"). I shall consider those two arguments in turn.

10. So far as the first argument is concerned, it must be accepted that the 1999 letter, as drafted by Moat, could have been better drafted. Nonetheless, it does represent a commercial contractual document, which has to be construed by reference to the well-established principles of construction, summarised by Lord Hoffmann in the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, in a passage which has been quoted so often that I do not propose to burden the shorthand writers with it again.

11. It is accepted by Mr Orr, as I have said -- indeed, it is argued by him in order to explain why Mr and Mrs Wilkinson were required to sign the 1999 letter in their own capacity -- that the effect of the 1999 letter was to effect a variation of the facility letter so as to change the subject matter of the facility letter from £100,000 to £250,000. He says, in his well presented argument, that that was as far as it went, so far as Mr and Mrs Wilkinson were concerned. In other words, he contends that the sole reason why they had to sign the 1999 letter was because a variation of the facility letter, the original contract which they guaranteed, would otherwise have released them, or at least might otherwise have released them, pursuant to the well-established principle that an increase in the liability of the debtor, by agreement with the creditor, without the agreement of the guarantor, may release the guarantor. I have some doubt as to whether that would have applied in this case because, as my Lord Lord Justice Jacob said in argument, if a bank lends more money to a debtor over and above the amount originally borrowed and guaranteed by the guarantor, that would not release the guarantor. So it is a little difficult to see why a variation of this sort from the original facility letter would have released the guarantor.

12. Nonetheless, it is unnecessary, in my view, to decide that point. Proceeding on the basis of Mr Orr's approach, which to my mind is well-founded, the effect of the 1999 letter was to agree a variation in the facility letter so that the reference to £100,000 was effectively agreed to be changed to £250,000. That must have carried with it, as I think Mr Orr is inclined to accept, that:

"Repayment of the loan [now £250,000] and interest on it must be secured at all times as a continuing security in a form and substance satisfactory to us:

"1. A Personal Guarantee given by David Ian Wilkinson and Barbara Wilkinson..."

"2. A Legal Charge given by the said David Ian Wilkinson and Barbara Wilkinson..."

Those provisions were plainly included within the expression "terms and conditions" of the facility letter referred to in the second paragraph of the 1999 letter and, indeed, must have been some of "the terms and conditions" referred to the second line of the facility letter itself.

13. Mr Orr argues, however, that all that Mr and Mrs Wilkinson were doing by signing the 1999 letter was agreeing that the company would undertake to obtain security as described in paragraphs numbered 1 and 2 of the facility letter. He says that, by signing the 1999 letter, Mr and Mrs Wilkinson were not saying that they would thereby agree to give such guarantees.

14. While admiring the ingenuity of that argument, it seems to me to fly in the face of reality. In my judgment, Mr and Mrs Wilkinson, by signing the 1999 letter and agreeing to the variation of the facility letter, confirming all "the terms and conditions" applied to the £250,000 and were agreeing that they would do that which the facility letter said they would do, namely that they would provide the security referred to in paragraphs numbered 1, 2 and 3 of the facility letter.

15. It is notable that they did not sign the facility letter itself and can therefore fairly say that they were not bound by it directly. However, when they signed the 1999 letter, it seems to me fanciful to think that they were not accepting that they were bound by the terms of the facility letter as varied by the 1999 letter. In other words, in my view Mr Orr's acceptance, indeed contention, that Mr and Mrs Wilkinson signed the 1999 letter to acknowledge the variation to the facility letter, carried with it accepting that they were bound by the variation to the facility letter, which included their having to provide a guarantee for the subject of the facility letter, namely £250,000.

16. As my Lord, Lord Justice Mummery pointed out in argument, it seems unreal to believe that Mr and Mrs Wilkinson could have thought in February 1999 that the bank was sufficiently concerned about the creditworthiness of the company to want security, as described in the facility letter, for £100,000's worth of borrowing but were content to risk a further £150,000's worth of borrowing by the company without any security. Equally, it is fanciful to think that the bank would have been prepared to lend a further £150,000 at the same rate of interest as the original £100,000 if the £150,000 was not subject to the same degree of security as the £100,000 was. I accept that that argument is somewhat weakened by the fact that the bank had advanced part of the balance of £150,000 some time before the 1999 letter and, as Mr Groom, who appears on behalf of Moat, very fairly points out to us, had advanced the balance of £150,000 very shortly before the 1999 letter. Nonetheless, it is fanciful to think that that last advance to which I have referred was not made other than in anticipation of the 1999 letter being executed. The 1999 letter plainly cannot have come out of the blue, all the more so in light of the reference to the recent discussions in the first paragraph of that letter.

17. As I have sympathy with the contention advanced by Mr Orr that, however much one can say they were engaged in business, or Mr and Mrs Wilkinson were probably small, relatively unsophisticated business people whereas Moat is clearly a substantial company, and that one accordingly should not be too indulgent Moat if it does not draft its documents as carefully or as clearly as it should have done. Nonetheless, it does seem to me unreal to construe the 1999 letter in the way in which Mr Orr contends and, indeed, in the way in which the Recorder construed it.

18. As I have mentioned, Mr Orr has a second argument, which is based on Section 4. Section 4, so far as relevant, provides that:

"No action shall be brought ... whereby to charge the defendant upon any special promise to answer for the debt... of another Person ... unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in writing and signed by the party to be charged therewith..."

19. Mr Orr's point is that the letter of 18th February 1999 is said by Moat to operate as a variation of the 1997 guarantee by Mr and Mrs Wilkinson and there is no reference to the 1997 guarantee in the 1999 letter and that, in those circumstances, the 1999 letter therefore fails to satisfy Section 4 even if, as my view is in the case, he fails on his first point.

20. Attractively as that argument was developed, I would reject it essentially for two reasons. First of all, it seems to me that, on a fair reading of the 1999 letter, agreement by Mr and Mrs Wilkinson that they will execute a new guarantee in respect of the company's liability for up to £250,000 rather than £100,000 and therefore no reference to the 1997 guarantee is necessary. In my view, as I have said, the effect of their signing the 1999 letter was that the terms of the facility letter were varied so that it referred to £250,000 rather than £100,000. The variation therefore was carried through, as I have mentioned, so as to impose an obligation on Mr and Mrs Wilkinson to provide:

21. "... the following security in a form and substance satisfactory to us [that is Moat]",

Namely a personal guarantee, a legal charge over property, and a charge over the shares.

That, to my mind, was a perfectly clear obligation. However, in relation to that, it is said such security as was referred to was unclear and unenforceable because it was to be "in a form and substance satisfactory to" Moat. To my mind that is not a good argument. First, I do not accept that that is, in principle, in any event, too uncertain to be enforceable. Secondly, on the facts of this case, it was obvious to everybody what the form and substance would be, namely those of the agreement which had been entered into, namely the 1997 guarantee entered into four days after the faculty letter. As for the fact that no such guarantee was entered into, the answer is that this was an undertaking to execute such a guarantee and, under the normal effectible principle enshrined in Walsh v Lonsdale , Mr and Mrs Wilkinson, having agreed bindingly to enter into such an arrangement, are to be treated as having done so.

Even if the letter of 18th February 1999 operated as an agreement to vary the 1997 guarantee, it would not fall foul of Section 4. I would refer to two passages in the judgments in this court in Timmins v Moreland Street Property Company Limited [1958] Ch 110. The first is in the judgment of Jenkins LJ at 130C to G, the second in that of Romer LJ between 134C and 143E. That case was concerned with the extent to which one could read a document signed by "the person to be charged" (to use the language of Section 4) together with another document in connection with the sister provision of Section 4, which had become Section 40 of the Law of Property Act 1925.

22. Jenkins LJ said this:

"... I think it is still indispensably necessary, in order to justify the reading of documents together for this purpose, that there should be a document signed by the party to be charged, which, while not containing in itself all the necessary ingrediants of the required memorandum, does contain some reference, express or implied, to some other document or transaction."

The same point was made by Romer LJ when he said:

"The 'reference' need not be express, but I cannot collect from the cheque any reference, even by implication, to the transaction in the course of which, and as part of which, the receipt was brought into existence."

23. In this case, there is no doubt that the reference to the original agreement in November 1997 was a reference to the facility letter and therefore that is satisfactorily incorporated into the 1999 agreement. The facility letter, in turn, refers to "a personal guarantee given" by Mr Wilkinson and Mrs Wilkinson. It is true that, at the date of the facility letter, no such guarantee existed the subsequent event, namely four days later, of the execution of the 1997 guarantee, cannot be ignored when one is construing the 1999 letter. To my mind, the reference in the judgment of Jenkins LJ and of Romer LJ to the possibility of a document being referred to by implication would apply here. In my judgment, if necessary, therefore, even if the 1999 letter is to be read as a variation of the 1997 guarantee, the reference to the facility letter, which itself refers to a guarantee to be executed by Mr and Mrs Wilkinson and which had been executed by them some four days later, means that Section 4 would be satisfied.

24. In those circumstances, with respect to the judge, to whom the arguments addressed may have been of a slightly different nature, I would hold that the liability of Mr and Mrs Wilkinson was increased from £100,000 maximum to £250,000 as a result of the 1999 letter. That then leaves the second point, which relates to the nature and effect (a) of the guarantee, namely whether it is a continuing or specific guarantee, and (b) if it is a specific guarantee, whether payments amounting to £46,000 should be treated pursuant to the rule in Clayton's Case.

25. We have been addressed on that point with some submissions. I do not, however, propose to deal with it because, as I understand it, in light of the conclusion I have reached on the first point, if my Lords are agreed, it is unnecessary to deal with the second point. I would be somewhat uncomfortable about dealing with the second aspect, namely the applicability of Clayton's Case, if, as I am inclined to think, this is a specific guarantee and not a continuing guarantee. There do appear to have been some authorities which might, and in fairness to counsel, I should emphasise the word might, be of relevance, to which we have not been referred.

26. In the event, therefore, I would allow the appeal on the first point and do not propose to deal with the second point.

Order: Appeal allowed. The matter is to be remitted to the Bury County Court to determine the amount in principle of interest for which judgment should be given if the parties are unable to agree. Costs of the appeal to be paid by the respondent but no order as to costs below.